Friday, April 30, 2010

"Banging the Close" and Other Urban Truths

The CFTC said Moore's fund portfolio manager tried to manipulate platinum and palladium futures from at least November 2007 through May 2008 by entering trades in the last 10 seconds of trading in a manner designed to exert upward pressure on the settlement prices. The practice is known as "banging the close." Reuters

"The timing of the SEC's filing of a civil securities fraud action against Goldman Sachs has created serious questions about the commission's independence and impartiality," said Darrell Issa, the top Republican on the House Oversight Committee, in a letter to the SEC on TuesdayReuters

I couldn't believe my eyes as I read the stories above. A Hedge Fund (and former employer), Moore Capital, caught manipulating closing prices and the SEC caught timing the release of GS fraud charges to further their agenda.

What's next? Will the experts soon assert, with somber gravitas, that life, in fact, exists....on Earth?

That is, the incredulous implication of the above articles (and many others these days) is to me, incredulous. Do we all really believe we take up no space? politicians and bureaucrats don't play politics? fund managers don't "window dress", "paint the tape" or "bang the close"?

Mr. Bacon of Moore Capital, for whom I have great respect as a trader, and from whom I learned a great deal during my short time there, is no fool. I'm sure he authorized the obligatory statement: Neither Moore Capital's principals nor its current management were involved in any improper trading, and none have been accused of any wrongdoing.

I'm just as sure he senses the absurdity therein.

Every big player in every market I've traded effects the price when they trade. Central Banks count on this effect when they "intervene"- a word that implies some deus ex machina instead of another institution with an ax to grind. Why should anyone care if a firm decides to make liberal use of the "Texas Hedge"- increasing exposure to push the price in their favor?

Ultimately, "Texas Hedging" requires a greater fool to relieve you of your position at the "manipulated" price, or the practice will generate losses. A Hedge Fund manager willing to give up 2% in the long run to get an extra 1% (and consequent (but temporary) increase in performance fee) at quarter's end is just making his job that much harder.

If "banging the close" is illegal how should we qualify the Fed and Treasury's decisions to buy hundreds of billions of dollars of non-performing mortgage debt and ring-fence other "toxic" assets from a dreaded mark-to-market?  Both aim to effect the market, and the state has a nasty habit of leaving the general public "holding the bag" on unwound Texas Hedges.

I'll take the former over the latter any day.

Where's the harm in the former? except to modern institutional myth belief. The myth to which I refer is the view that modern institutions both public and private are impartial and altruistic, peopled by angels, and not humans.

I've little doubt both the CFTC's and SEC's cases are "timed" for effect. The state is trying to dispel the mythic quality of finance- to change public perception thereof (the fines are mainly beside the point). After all, that is the game they play. Explicitly, politicians and bureaucrats through policy and media access aim to effect popular opinion. Are we next going to chastise judges who aim to "make an example" of someone? Isn't deterrence an aim of public policy?

Of course, the state takes a risk in their myth dispelling goal. Once myth-busting becomes a habit, who knows which myths are next to face apocalypse? If finance is revealed to be just a bunch of guys with axes to grind, so too, the public may soon learn, are politics.

The public might even learn the money in their pocket has no intrinsic value- Insha'Allah.

I hope this myth-busting leads, as it often does, to renewal. I'm aware, however, that the path of social myth-busting is often chaotic. Dashed dreams make for unhappy people. On the bright side, dashed dreams improve one's sense of reality, if one is strong enough to get over the disappointment.

In Hindu theology, Shiva, The Destroyer (of myths) leads Brahma, The Beginner. It is said nobody worships the Brahma phase of the Hindu Trinity, perhaps because worship requires the sense of awe destroyed by Shiva. After Brahma comes Vishnu, renewed worship and a period of institutional status quo. Old myths acquire new faces.

The cycle repeats.